The Impact of Unions on Labor's Share of Income: A Time-Series Analysis

Early time-series studies that examined the impact of unions on labor's share of income were primarily descriptive. They generally found that unions did not impact labor's share of income. In contrast, later studies, using either panel data or cross-section data, have produced mixed results. This study adds to our understanding of this topic by first developing an analytical model based on imperfect competition and then testing the model using time-series data for the US manufacturing sector from 1949-2006. The results demonstrate that unions have a positive impact on labor's share of income. They show that for each one percentage point reduction in union density, the proportion of income received by production workers declines by about 0.2 percentage points, holding other factors constant. From 1949 to 2006, labor's share of income declined approximately 25 percentage points; around 28% of that decline is explained by the decline in unionization. This paper is distinctive in estimating the proportion of the decline in labor's share attributable to declining unionization. It also has important implications for the Employee Free Choice Act and sheds light on whether social or institutional forces can affect the distribution of income.